RISING INTEREST IN INDUSTRIAL POLICY SIDESTEPS AFRICA
Industrial policy has been one of the most controversial issues in economics, especially in development economics (for a review of the industrial policy debate since the 1980s, see Chang 2011). Particularly surrounding its role in the development success of East Asia, there was a fierce debate that came to a head in the late 1980s and the early 1990s (Amsden 1989; Wade 1990; World Bank 1987, 1991, and 1993; Stiglitz 1996).
Fortunately, during the last decade or so there have been a number of developments in academia and in the real world that have made industrial policy more acceptable and thus the debate surrounding it less ideologically charged and more pragmatic and nuanced.
At the theoretical level, the market fundamentalist view that there are very few theoretical justifications for industrial policy has lost its dominance. On top of that, the infant industry argument has been refined in a number of ways (Chang 2002; Shaffaedin 2005; Greenwald and Stiglitz 2006; Dosi, Cimoli, and Stiglitz 2009). An increasing number of more orthodox economists accept that there are many types of market failures that need to be addressed through industrial policy—not just the more conventional “externalities” problem, but also economies of agglomeration and coordination failures (see Lin’s interventions in Lin and Chang 2009; Lin and Monga 2012).
The interpretation of the evidence on industrial policy has also evolved. It is increasingly recognized that industrial policy is not some highly idiosyncratic practice found only in East Asian “miracle” economies (Japan, South Korea, Taiwan, and Singapore), but what most of today’s rich countries used when they were catch-up economies themselves (Bairoch 1993; Chang 2002 and 2007; Reinert 2007). Some econometric studies have even identified a positive correlation between protectionism and economic growth in the late nineteenth and early twentieth centuries (O’Rourke 2000; Vamvakidis 2002; Clemens and Williamson 2001). Irwin (2002) provides a criticism of these studies, which is then countered by Lehmann and O’Rourke (2008). In particular, the increasing recognition of Britain and the United States—the supposed homes of free market and free trade policies—as the pioneers of infant industry promotion through protectionism and other forms of industrial policy has added a whole new complexity to the history of capitalist development. Recent studies, especially Chang (2002) and Reinert (2007), have revealed that the practice of infant industry promotion was first systematically applied by Robert Walpole, the British prime minister from 1721 to 1742, and the theory of it was first invented by Alexander Hamilton, the first U.S. treasury secretary, in his report to the U.S. Congress in 1791 (see Chang [2002] for further details; see Hamilton [1791] for his original report).
The import substitution industrialization (ISI) experience in the developing world before the 1980s has also been subject to a more nuanced interpretation. The role of industrial policy in the significant economic development achieved by many Latin American countries between the 1930s and the 1980s is increasingly accepted, as well as the success of earlier protectionism in the continent in the late nineteenth and the early twentieth centuries (on the latter, see Clemens and Williamson [2004]). Even the typical depiction of industrial policy in Africa, especially Sub-Saharan Africa, in the 1960s and the 1970s as an unmitigated disaster has been questioned (Jerven 2011).
More recently, the 2008 global financial crisis has enhanced the legitimacy of industrial policy. First, the crisis prompted some major industrial policy actions—both defensive and proactive—by the rich countries that used to preach against industrial policy (for example, bailout of U.S. automakers and an increase in “green” subsidies in many developed countries, including the United States). Second, the crisis has prompted countries like the United States, and especially Britain, to accept that their financial sector had been overdeveloped and therefore that there is a need to rebalance their economies by reviving the manufacturing sector, through industrial policy if necessary. Third, since the crisis, the continued rise of China (and to a lesser extent Brazil) and the solid performance of Germany, all of which have actively used industrial policy, have also made people reassess the importance of industrial policy.
This general shift in the mood in favor of industrial policy has not, however, extended to the African countries. However effective the policy may have been in Japan, Korea, or China (or even the United States in the nineteenth century), it is argued, it simply cannot work in those African countries. A wider range of reasons is given—such as excessive natural resource endowments (the so-called resource curse thesis), pathological politics, the lack of bureaucratic capabilities, and the changes in the global economic rules—but the implication is that the African countries would be better off sticking to their natural resource advantages rather than trying to develop manufacturing industries through industrial policy.
ARE AFRICA’S DEVELOPMENT FAILURES STRUCTURAL? CLIMATE, GEOGRAPHY, CULTURE, AND HISTORY
In this section, I discuss those factors that are supposed to make industrial policy inapplicable to Africa, but, before doing that, I first need to critically review those arguments that Africa is doomed to development failure because of its climate, geography, culture, and history—a group of arguments known as “Afro-pessimism” (the most prominent examples include Easterly and Levine [1997]; Bloom and Sachs [1998]; Collier and Gunning [1999]; Sachs and Warner [2001]; and Acemoglu, Johnson, and Robinson [2001]).
Now, in discussing these arguments, we should bear in mind that there is a huge problem in talking of Africa as if it is homogeneous. After all, it is a continent of nearly sixty countries (the exact number depends on your attitude toward entities like Western Sahara) with very varied natural and human conditions. If most African economies look rather similar to each other economically, it is not because they are in the same continent, but because all economies—in whichever continent they are—at low levels of development look rather similar to each other due to the lack of specialization and diversification in the production structure, which then leads to high degrees of homogeneity in occupational structures, social organizations, and lifestyles. Bearing this important point in mind, let us see how those arguments that emphasize structural factors, like climate, geography, culture, and history, explain African development experiences.
According to the argument emphasizing the climate factors, being close to the equator, the African countries suffer from tropical diseases such as malaria. These diseases become burdens on economic development, as they reduce worker productivity and raise health care costs. Some also point out that tropical soil is of poor quality, reducing agricultural productivity.
The geography argument points out that many African countries are landlocked and thus are disadvantaged in integrating into the global economy through international trade. Many of them are also in “bad neighborhoods” in the sense that they are surrounded by other poor countries that have small markets (that restrict their trading opportunities) and, frequently, violent conflicts (that often spill over into neighboring countries).
Two aspects are highlighted by those arguments emphasizing the historical factors: ethnic diversity and colonialism. The high ethnic diversity of many African nations makes their people distrust each other, raising transaction costs. Ethnic diversity, it is pointed out, is likely to encourage violent conflicts, especially if there are a few groups of similar strengths (rather than many small groups, which are more difficult to organize). Africa’s colonial history is argued to have produced low-quality institutions in most African countries, as the colonizers did not want to settle in countries with too many tropical diseases (so there is an interaction between climate and institutions) and thus only installed low-quality institutions that were needed for resource extraction (“extractive institutions” of Acemoglu, Johnson, and Robinson [2001]).
The cultural argument is usually presented in rather convoluted ways to avoid the accusation of racism, but it is essentially that African culture is bad for economic development: Africans do not work hard, do not plan for the future, and cannot cooperate with each other. In explaining the economic divergence between South Korea and Ghana, two countries that were at similar levels of economic development in the 1960s, Samuel Huntington of
The Clash of Civilizations fame argues: “Undoubtedly, many factors played a role, but…culture had to be a large part of the explanation. South Koreans valued thrift, investment, hard work, education, organisation, and discipline. Ghanaians had different values. In short, cultures count” (2000, xi). Daniel Etounga-Manguelle (2000), a Cameroonian engineer and writer, notes: “The African, anchored in his ancestral culture, is so convinced that the past can only repeat itself that he worries only superficially about the future. However, without a dynamic perception of the future, there is no planning, no foresight, no scenario building; in other words, no policy to affect the course of events” (69). And then he goes on to say that “African societies are like a football team in which, as a result of personal rivalries and a lack of team spirit, one player will not pass the ball to another out of fear that the latter might score a goal” (75).
THE CRITICISMS
All the factors highlighted by the “structural” arguments discussed earlier are relevant, to one degree or another. However, that a factor is given by nature or history does not mean that the outcome is predetermined. Indeed the fact that most of today’s rich countries have also suffered from similar “structural” handicaps suggests that all those structural factors are not insurmountable (Chang 2009a, 2009b, and 2010).
CLIMATE
In relation to the climate argument, I should first note that many of today’s rich countries used to have malaria and other tropical diseases, at least during the summer—not just Singapore, which is right in the middle of the tropics, but also southern Italy, the southern United States, South Korea, and Japan. These diseases have largely (although not entirely) disappeared in those countries not because their climates have somehow changed, but because they have better sanitation (that has vastly reduced their incidences) and better medical facilities (that allow them to effectively deal with the few cases that still occur) thanks to economic development.
Moreover, it should be pointed out that not just tropical climates but also frigid and arctic climates (affecting a number of rich countries, such as Finland, Sweden, Norway, Canada, and parts of the United States) impose economic burdens—machines seize up, fuel costs skyrocket, and transportation is blocked by snow and ice. The Scandinavian countries used to be effectively landlocked for half of the year until the advent of the ice-breaking ship in the late nineteenth century. Once again, the cold climate doesn’t appear to hold those rich countries back because they have acquired the money and the technologies to deal with it (the same as in the case of Singapore’s tropical climate).
When you think about it, there is no a priori reason to believe that a cold climate is better than a hot climate for economic development. Indeed in
Politics (Book VII, chapter 7), Aristotle argued that the European societies are not very developed because their climate is too cold, which makes their people, well, stupid. He said: “Those who live in a cold climate and in Europe are full of spirit, but wanting in intelligence and skill; and therefore they retain comparative freedom, but have no political organization, and are incapable of ruling over others. Whereas the natives of Asia are intelligent and inventive, but they are wanting in spirit, and therefore they are always in a state of subjugation and slavery. But the Hellenic race, which is situated between them, is likewise intermediate in character, being high-spirited and also intelligent. Hence it continues free, and is the best governed of any nation, and if it could be formed into one state, would be able to rule the world” (Aristotle 2001, 1286).
Therefore to blame Africa’s underdevelopment on climate is to confuse the cause of underdevelopment with its symptoms—poor climate does not cause underdevelopment; a country’s inability to overcome the constraints imposed by its poor climate is a symptom of underdevelopment.
GEOGRAPHY
Much has been made out of the landlocked status of many African countries. Landlockedness does impose economic burdens, but then how do we explain the economic successes of Switzerland and Austria? These are two of the richest economies in the world, but they are both landlocked. Some people would respond to this point by saying that those countries could develop because they had good river transport, but many landlocked African countries are potentially in the same position: for example, Burkina Faso (the Volta), Mali and Niger (the Niger), Zimbabwe (the Limpopo), and Zambia (the Zambezi). So once again the argument is based on confusion between the cause and the symptom—it is the lack of investment in the river transport system, rather than the geography itself, that is the problem.
Being in a “bad neighborhood” may not be as disadvantageous as it may seem. India has grown very fast in the last couple of decades despite being in the poorest region in the world (poorer than Sub-Saharan Africa), with its share of conflicts (the long history of military conflicts between India and Pakistan, the Maoist Naxalite guerillas in India, Hindu-Muslim violence in India, the Tamil-Sinhalese ethnic war in Sri Lanka, and so on).
HISTORY
It would be silly to deny that ethnic divisions can hamper growth. However, their effects should not be exaggerated. Ethnic diversity is the norm elsewhere too. Even ignoring ethnic diversities in immigrationbased societies like the United States, Canada, and Australia, many of today’s rich countries in Europe have suffered from linguistic, religious, and ideological divides—especially of the “medium degree” (that is, a few, rather than numerous, groups) that is supposed to be most conducive to violent conflicts. Belgium has two (and a bit, if you count the tiny German-speaking minority) ethnic groups. Switzerland has four languages and two religions, and has experienced a number of mainly religion-based civil wars. Spain has serious minority problems with the Catalans and the Basques, which have even involved terrorism. Due to its 560-year rule over Finland (1249 to 1809, when it was ceded to Russia), Sweden has a significant Finnish minority (around 5 percent of the population); likewise, in Finland there is a Swedish minority of similar proportion. The examples can go on.
The East Asian countries, often believed to have exceptionally benefited from their ethnic homogeneities, also have serious internal divisions. You may think Taiwan is ethnically homogeneous, as its citizens are all “Chinese.” However, to begin with, there is actually a tiny native population of Polynesian origin (the so-called Kaoshan people). Moreover, even the “Chinese” population consists of two (or four, if you divide them up more finely) linguistic groups (the mainlanders vs. the Taiwanese) that are hostile to each other. Japan has serious minority problems with the Koreans, the Okinawans, the Ainus, and the Burakumins. South Korea may be one of the most ethno-linguistically homogeneous countries in the world, but that has not prevented my fellow countrymen from hating each other. For example, there are two regions in South Korea that particularly hate each other (southeast and southwest), so much so that some people from those regions would not allow their children to get married to anyone from “the other place.” In this regard, it is very telling that Rwanda is nearly as homogeneous in ethno-linguistic terms as Korea but that the homogeneity did not prevent the ethnic cleansing of the formerly dominant minority Tutsis by the majority Hutus—this is an example that proves that “ethnicity” is a political, rather than a natural, construction.
The previous examples show that rich countries do not suffer from ethnic heterogeneity not because they do not have it, but because they have succeeded in nation building (which, I should note, was often an unpleasant and even violent process). Indeed despite being genetically the most heterogeneous country in the world, Tanzania has been very successful in nation building, and it has not had any serious ethnicity-based conflicts.
Finally, the argument that bad institutions are holding Africa back (and often they are) should be tempered by the fact that, when they were at similar levels of material development to those we find in Africa currently, the institutions of today’s rich countries were in a far worse state than what we find in Africa today (Chang 2002, ch. 3). These rich countries built the good institutions largely after, or at least in tandem with, their economic development. In other words, high-quality institutions are as much outcomes as they are the causes of economic development.
CULTURE
Many people who believe that “bad” cultures are holding Africa back do not usually realize that all of the descriptions of those “negative” cultural traits of Africa heard today used to be hurled at many rich countries when they were poor (Chang 2007, ch. 9).
Before the start of German economic development in the mid-nineteenth century, the British would frequently say that the Germans were too stupid, too individualistic, and too emotional for economic development—the exact opposite of the stereotypical image that they have of the Germans today and exactly the sort of things that people now say about the Africans. For example, John Russell, an early-nineteenth-century British traveler in Germany, remarked: The Germans are a “plodding, easily contented people…endowed neither with great acuteness of perception nor quickness of feeling…. It is long before [a German] can be brought to comprehend the bearings of what is new to him, and it is difficult to rouse him to ardour in its pursuit” (Russell 1828, 394). When traveling in Germany, Mary Shelley, the author of Frankenstein, complained that “the Germans never hurry” (Shelley 1843, 276).
Until the early twentieth century, Australians and Americans would go to Japan and say the Japanese were lazy. Having toured lots of factories in Japan, an Australian engineer remarked in 1915: “My impression as to your cheap labour was soon disillusioned when I saw your people at work. No doubt they are lowly paid, but the return is equally so; to see your men at work made me feel that you are a very satisfied easy-going race who reckon time is no object. When I spoke to some managers they informed me that it was impossible to change the habits of national heritage” (
Japan Times). Even Sidney Gulick, an American missionary who lived in Japan for twenty-five years and later became a champion of Asian American human rights back in the United States, had to admit that many Japanese “give an impression…of being lazy and utterly indifferent to the passage of time” (Gulick 1903, 117).
The Koreans were held in even lower esteem. In 1912, they were condemned as “12 millions of dirty, degraded, sullen, lazy and religionless savages who slouch about in dirty white garments of the most inept kind and who live in filthy mudhuts.” That comment came from a leading female socialist intellectual at the time, that is, Beatrice Webb of the Fabian movement (Webb and Webb 1978, 375), so one can imagine what a regular European male conservative would have said about the Koreans had he visited the country.
Of course, the cultures of Germany, Japan, and Korea today are completely different from what was previously described. Those transformations happened mainly because of economic development, which created societies in which people have to behave in more disciplined, calculating, and cooperative ways than in agrarian societies. These historical examples show that culture is more of an outcome, rather than a cause, of economic development. Given this, it is wrong to blame Africa’s (or any region’s or any country’s) underdevelopment on its culture.
NATURAL RESOURCE ABUNDANCE AND INDUSTRIAL POLICY
In relation to industrial policy more specifically, the natural resource abundance of Africa is often cited as the reason why industrial policy is unwise and/or unworkable. First, it is argued that the African countries have relative abundance (and therefore comparative advantage) in natural resources. Given this, trying to industrialize, especially “artificially” through industrial policy, would be bad for their economies. Second, countries with natural resource abundance, it is argued, suffer from perverse politics in the forms of corruption and violent conflicts (a form of “resource curse”). Trying to graft industrial policy onto that political economy, it is pointed out, will mean that it will only be abused, even if it worked elsewhere.
NATURAL RESOURCE ABUNDANCE AND COMPARATIVE ADVANTAGE
Many people take it for granted that the African countries are well endowed with natural resources, but in fact few of them are (see Chang 2006 for further details). Fewer than a dozen African countries have any significant mineral deposits. Only South Africa and the Democratic Republic of the Congo (DRC) are exceptionally well endowed with more than one mineral resource. Most African countries may have low population density and thus a lot of land, but only a handful of them are exceptionally well endowed with arable land (Niger, Liberia, DRC, Chad, Senegal, Sierra Leone, and the Central African Republic). Most African countries look abundantly endowed with natural resources only because they have so few manmade resources, such as machines, infrastructure, and skilled labor. Moreover, even in the case of countries that have exceptionally abundant natural resource endowments, exploiting them without any clear long-term industrial policy is unlikely to lead to long-term economic development.
Except for a few small oil-rich countries like Brunei, Kuwait, and Qatar, no country—not even the United States, Australia, or Canada, the three countries that are best endowed in the world with natural resources—has been blessed by nature to such an extent that it could become rich only by doing things that came “naturally.” Australia has the smallest manufacturing sector (in per capita terms) by far among the rich countries (it is one-third smaller than the next smallest ones) owing to its abundant natural resource endowments, but even it produces, at $2,422, manufacturing value added (MVA) per capita that is 35 times greater than relatively more industrialized Senegal ($69) and 220 times greater than the least industrialized Niger ($11) (all figures are as of 2005, in 2000 dollars; UNIDO 2009, 129, table 1). Given that Senegal’s and Niger’s natural resource endowments are not even remotely as abundant as that of Australia, they will have to industrialize much more than Australia has done if one day they are to have living standards that are comparable to that of Australia’s today.
We should also note that few countries actually do “natural” things. Even many “primary” commodities are not natural but products of colonialism. For example, many African countries export cocoa and tea, which were brought from, respectively, Central America and China to Africa by the imperialists. When it comes to high-productivity activities whose existence determines whether a country is economically developed or not, countries become good at something only because they deliberately decide to become so—there is really no “natural” reason for the Japanese to be good at building cars, the Finns at making mobile phones, and the Koreans at making steel.
If we left things to the market, high-productivity industries simply would not get established in developing countries, as there are already superior producers from the more advanced countries. If they want to develop those industries, they have to protect and nurture those industries through tariffs, subsidies, and other means of industrial policy—this is, of course, the logic of infant industry promotion, which I discussed earlier. If the African countries are to develop their economies, they will have to deploy an industrial policy that will eventually make their “natural advantage” industries unimportant by developing higher-productivity activities.
By saying this, I am not trying to argue that the African countries should ignore their natural resource–based industries. There are at least two reasons. First, it takes a lot of time to develop new industries. For example, it took forty years for the Japanese car makers (established in the early 1930s) to break into the world market, while it took seventeen years for Nokia electronics (founded in 1960) to make any profit. Therefore before the new industries fully develop, the natural resource–based sectors need to provide the output, jobs, and, above all, export earnings that will finance the imports of machinery and technologies for the new industries. Second, natural resource–based industries can be, and should be, upgraded (on how to upgrade out of the natural resources sectors, see discussions in Chang [2008, section III]). Despite having very little land (the fifth highest population density in the world, excluding island- and city-states), the Netherlands is the third largest agricultural exporter in the world, as it has upgraded its agriculture.
In the long run, however, successful upgrading of natural resource–based industries requires successful industrialization. The Netherlands has a high-productivity agricultural sector only because it has “industrialized” the sector, using its strengths in industries like electronics (for example, computer-controlled feeding) and chemicals (for example, fertilizers and pesticides). In the end, the African countries will have to get into many industries that today
no one would think they can succeed in if they are going to become economically developed. And, as I argued earlier, that requires systematic industrial policy.
NATURAL RESOURCE ABUNDANCE AND PERVERSE POLITICS
In relation to the argument that natural resource abundance in Africa is bound to create a perverse pattern of politics (corruption and violent conflicts) that leads to abuse of industrial policy, even if it were true, it would apply to only a handful of African countries, as most African countries are not that particularly well endowed with natural resources in the first place, as I have pointed out earlier.
Moreover, there is no inevitable relationship between a country’s natural resource endowment and its politics. If natural resource abundance inevitably led to perverse politics, we could explain how many countries—not just super well-endowed United States, Canada, and Australia, but also the Scandinavian countries—have not developed perverse forms of politics despite (or in many cases because of) their abundant natural resource endowments (see Wright and Czelusta [2004, 2007] on the role of natural resources in the economic development of the United States). In addition, in the late nineteenth and early twentieth centuries, the fastest growing regions of the world were resource-rich areas like North America, Latin America, and Scandinavia, which shows that the “resource curse” is not something that is inescapable.
POLITICAL ECONOMY CONSIDERATIONS: LEADERSHIP, STATE COHERENCE, AND STATE-SOCIETY RELATIONSHIP
Even ignoring perverse politics due to natural resource abundance, there is a general concern that the political economy of most African countries makes effective implementation of industrial policy impossible. Many people characterize politics in most African countries as “neopatrimonial,” which undermines economic rationality in favor of “Big Man” politics (for a comprehensive critique of this literature, see Mkandawire [2013]). Given this political economy, it is believed that any policy that suspends market discipline will be hijacked and abused, unlike in East Asia or Europe.
This argument is partly in line with one key conclusion of the industrial policy debate, which is that a key difference between success stories and failure stories of industrial policy is in the differences in their political economy (Toye 1987; Amsden 1989; Chang 1994; Evans 1995). There are three aspects to this.
First, political leadership is considered important in determining the nature of industrial policy. Even if we ignore some extreme cases in which the leaders are interested only in personal aggrandizement, the leaders may have a “wrong” vision. They may be looking backward, rather than forward, as Thomas Jefferson did when he opposed Hamilton’s infant industry protection. Or they may be hostile to private sector development, as many African countries’ leaders were in the 1960s and the 1970s. Or, as many nineteenth-century liberal politicians did, they may think that doing nothing, other than protecting private property, is really the best industrial policy.
Second, even if the political leaders have the “right” vision, they should be able to impose that vision on the rest of the state apparatus. While in theory the state is a hierarchical organization, in practice the wish at the top does not always percolate through the hierarchy. There will be some degree of self-seeking by government bureaucrats, although not as much as it is assumed in the public choice theory. There will also be problems arising from clashing visions (for example, the bureaucrats may be more conservative than the political leaders), turf wars within the bureaucracy, “tunnel vision” that specialized organizations are wont to develop, internal coordination failures (coming from poor organizational design inside the government or the emergence of new issues that cut across the existing organizational structure), and many other reasons.
Third, even if the leadership has the right vision and even if the state apparatus is coherent, the state still should be able to impose its will on other agents in the society. In some extreme cases, the state may not even have full control of its claimed territories. In some countries, the state cannot implement policies effectively due to manpower and resource shortages. Even when the state has enough enforcement capabilities, there will be attempts by some private sector agents to neutralize or even pervert policies through lobbying and bribing.
The tendency is to assume that these types of political economy problems are uniquely serious in the African countries, but this assumption lacks empirical foundations (Mkandawire 2013). In addition, the advanced economies all suffered from these problems in the past (and some of them still do to an extent). In fact, when they were at levels of economic development comparable to today’s African countries, the developed countries were actually much worse in terms of suppression of democracy, corruption, state capture, incoherence of the state machinery, nepotism, and other “pathological” forms of politics (Chang 2002, ch. 3).
Whatever we think of African countries’ political economy problems, we should not let the best be the enemy of the good. The existence of those problems should not make us believe that African countries have to wait for a perfect state to emerge before doing anything. In the real world, successful countries are those that have managed to find “good enough” solutions to their political economy problems and gone on to implement industrial (and other) policies rather than sitting around bemoaning the imperfect nature of their political systems.
In fact, quite a few of the successful “industrial policy states” themselves overcame political obstacles to effective statecraft in situations that did not instill much hope. For example, between the fall of Napoleon and the end of World War II, the French state was notoriously laissez-faire, ineffectual, and conservative. However, this was completely changed after the war, with the rise of Gaullisme, the establishment of the planning commission, and the foundation of the École Nationale d’Administration (ENA), the famous school for elite bureaucrats (Cohen 1977; Kuisel 1981). For another example, the Kuomintang (Nationalist Party) bureaucracy was arguably one of the most corrupt and inefficient in modern history when it ruled mainland China. However, after being forced to migrate to Taiwan following defeat by the communists in 1949, it was transformed into a highly efficient and relatively clean bureaucracy. This was done through a gradual but deliberate process of building “islands of competence” and then giving them greater responsibilities as they succeeded and increased their legitimacy and status within the bureaucracy, finally replacing much of the old bureaucracy with the new one (Wade 1990).
“DO NOT TRY THIS AT HOME”: THE QUESTION OF BUREAUCRATIC CAPABILITIES
Whatever the political intention and power of the top leadership may be, policies are likely to fail if the government officials implementing them are not capable. They have to make difficult decisions with limited information and fundamental uncertainty, often under political pressure from inside and outside the country. Dealing with all of this requires competent decision makers. On this ground, it has been argued that “difficult” policies like (selective) industrial policy should not be tried by countries with limited bureaucratic capabilities, especially the African countries (World Bank [1993] is the best example).
In other words, this is the policy world equivalent of the “do not try this at home” (DNTTAH) warning that accompanies the demonstration of difficult and dangerous stunt acts in TV shows. However, there are numerous problems with this argument.
First, the assumption is that industrial policy is exceptionally difficult. However, this assumption is made without any theoretical reasoning or empirical evidence. For example, World Bank (1993) assumes that policies getting the “fundamentals”—such as human capital, agriculture, and macroeconomic stability—right are easier than industrial policy, but there can be no such presumption. Different governments have competences in different areas—the Japanese government was good at industrial policy but messed up macroeconomic policies in the 1990s. The ease of a policy will also partly depend on its scale. For example, promoting a few industries through industrial policy may be a lot easier than organizing a mass education program. It will also depend on the number of agents involved in the policy. Trying to coordinate investments among a few large firms may be easier than organizing a country-wide distribution of subsidized fertilizer that involves millions of small farmers who are not organized into cooperatives and are scattered all over the country.
Second, another (implicit) assumption behind the DNTTAH argument is that industrial policy requires sophisticated knowledge of economics—as exemplified by the comment by Alan Winters, the former head of the research department at the Bank and the former chief economist of the U.K. government’s Department of International Development (Df I D), that “the application of second-best economics needs first-best economists, not its usual complement of third- and fourth-raters” (Winters 2003, 66). But is this true? An important fact in this regard is that the East Asian economic bureaucrats were
not “first best economists.” While they were smart people, most of them were not even economists. The majority of the Japanese economic officials that engineered the country’s “miracle” were graduates from the law department of Tokyo University. Until the 1980s, what little economics they knew were mostly of the “wrong” kind—the economics of Karl Marx and Friedrich List, rather than neoclassical economics. In Taiwan, most key economic bureaucrats were engineers and scientists, as is the case in China today. Korea also had a high proportion of lawyers in its economic bureaucracy until the 1970s, while the brains behind the famous heavy and chemical industrialization (HCI) program in the 1970s, Oh Won-Chul, was an engineer by training. Both Taiwan and Korea had rather strong, albeit officially unacknowledged, communist influence in their economic thinking until the 1970s.
1Third, many advocates of the DNTTAH argument believe that highquality bureaucracies are very difficult to build and that the East Asian countries were exceptionally lucky to have inherited them from history. However, a high-quality bureaucracy can be built pretty quickly, as shown by the examples of Korea and Taiwan themselves. Contrary to the popular myth, Korea and Taiwan did not start their economic “miracles” with high-quality bureaucracies. For example, until the late 1960s, Korea used to send its bureaucrats for extra training to—of all places—Pakistan and the Philippines. Taiwan also had a similar problem of generally low bureaucratic capabilities in the 1950s and most of the 1960s. These countries could construct a high-quality bureaucracy only because they invested in training, organizational reform, and improvement in incentive systems. In addition, there was also a lot of “learning by doing.” By trying out relatively easy industrial policy from early on, the East Asian bureaucrats could build up the capabilities they needed to effectively run more sophisticated industrial policy later. In other words, there has to be some trying at home if you aspire to become good enough to appear on TV with your own stunt act.
Last but not least, the fact that something is difficult cannot be a reason not to try it. When it comes to personal advancement, we actually go to the other extreme and encourage our youngsters to aspire to become the best of the best, when most of them are going to end up as production line workers or shop assistants rather than prime ministers or business tycoons. Even when it comes to countries, developing countries are routinely told to adopt “best practice” or “global standard” institutions used by the richest countries when many of them clearly do not have the capabilities to effectively run the American patent law or Scandinavian welfare system. However, when it comes to industrial policy, countries are told to aim low and not to try at all, or at best to try to learn from the Southeast Asian countries, which used more market-conforming (and therefore presumably easier) industrial policy than did the East Asian countries (this is the position taken by World Bank [1993]). I am all for people warning against the risks involved in aiming too high, but why should countries aim low only when it comes to industrial policy?
The problems of low bureaucratic capabilities are real in most African countries. However, they should not be exaggerated. They are not unique to industrial policy, nor are they unique to Africa. And there can be no presumption that industrial policy is necessarily more demanding in terms of bureaucratic capabilities than other policies are. More importantly, in the longer run, bureaucratic capabilities may be enhanced (and relatively quickly at that) with appropriate investments and “learning by doing” so their poverty at the present moment cannot be an excuse for not using industrial policy ever in the future.
CHANGING RULES OF THE GLOBAL ECONOMY
The changes in global rules of trade and investment since the 1990s—through the World Trade Organization (WTO), bilateral and regional Free Trade Agreements (FTAs), and bilateral investment treaties (BITs)—have made use of many of the classic tools of industrial policy either banned or significantly circumscribed. Given this, it is argued that developing countries, including the ones in Africa, should not waste their time thinking about policies that cannot be used anyway.
The most important changes have been brought about by the launch of the WTO in 1995. Quantitative restrictions (for example, quotas) have been banned altogether. Tariffs have been reduced and “bound” (that is, tariff ceilings have been set). Export subsidies are banned. Most other subsidies (except those frequently used by the rich countries, such as those for agriculture, research and development [R&D], and regional equalization) have become open to countervailing duties and other retaliatory measures. New issues, like regulations on foreign direct investment (FDI) and intellectual property rights (IPRs), have been brought under the jurisdiction of the WTO, making it difficult for countries to “borrow” foreign technologies for free by violating IPRs or put performance requirements (regarding things like local contents) on the transnational corporations (TNCs) that make FDI.
While the WTO has certainly made industrial policy more difficult to implement, the constraints imposed by it should not be exaggerated. To begin with, even on paper the WTO by no means obliges countries to abolish all tariffs—only to bind them. Although the middle-income developing countries were forced to bind most of their tariffs, the least developed countries (LDCs), including most countries in Africa, were exempt from tariff binding. Even though some low-income countries chose to bind some tariffs, the extent of such binding is small and the ceiling is quite high. So the “policy space” for using tariffs is still considerable for the LDCs.
2Second, the use of emergency tariff increases (“import surcharges”) is allowed on two grounds. The first is a sudden surge in sectoral imports, which a number of countries have already used. The second is the overall balance of payments (BOP) problem, for which almost all developing countries, including the African ones, would qualify, and which quite a few countries have also used. Because countries have discretion over the coverage and the levels of emergency tariffs that are meant to lessen the BOP problem, they can target particular industries through this provision.
Third, not all subsidies are “illegal” for everyone. For example, the LDCs are allowed to use export subsidies. Given the enormous benefits that exports generate for developing countries—by enabling them to import better technologies, by exposing them to international quality standards, and by making it easier for them to measure performance of the recipients of industrial policy supports—this is a very valuable policy tool that many African countries can utilize. Also, subsidies for agriculture, regional development, basic R&D, and environment-related technology upgrading are at least de facto allowed.
3 Even though some of these subsidies are not relevant for most African economies (for example, R&D subsidies), others (for example, agricultural subsidies) are, so they should use them proactively. Moreover, the subsidy restrictions only cover “trade-related” subsidies, which means that “domestic” ones can be used (for example, subsidies on equipment investments, subsidies for investment in particular skills).
Fourth, the trade-related intellectual property rights (TRIPS) agreement has certainly made technology absorption more expensive for developing countries (Chang 2001). However, this mainly affects the middle-income countries. The technologies that most African countries need are often the ones that are too old to be protected by patents.
Fifth, the trade-related investment measures (TRIMS) agreement has banned certain policy measures that had been successfully used by both the developed and the developing countries in the past (Kumar 2005) (for example, local contents requirements and trade balancing requirements), but other measures are still allowed. These include conditions regarding the hiring of local labor (a good way to create technological spillover effects), technology transfer, and the conduct of R&D in the host country. They can also provide targeted subsidies, directed credits, and tailor-made infrastructure (measures that Singapore and Ireland have used to attract FDI into “targeted” industries; Chang 2004), insofar as these do not violate the most-favored nation (MFN) provision (Thrasher and Gallagher 2008). Many of these measures are relevant for the African countries.
Even though the WTO rules allow quite a lot of industrial policy measures, especially for the LDCs and other poor economies, this policy space is in practice highly constrained by other international factors. First, the conditions attached to bilateral and multilateral aids and loans, on which they are quite dependent, significantly constrain their industrial policy space. Second, many developing countries are also parties to bilateral and regional trade and investment agreements, which tend to be even more restrictive than the WTO agreements (Thrasher and Gallagher 2008).
So all in all the range of industrial policy measures that developing countries can use has become considerably smaller compared to the 1960s and the 1970s. However, there is still room for maneuver for countries that are clever and determined enough, especially for the poorest economies, many of which are African, that are subject to less systemic restrictions (especially in relation to tariffs and subsidies).
Moreover, the new global rules of trade and investment are not some unalterable laws of nature. They can be, and should be, changed if they are found wanting. The modification of the TRIPS agreement in relation to HIV/AIDS drugs is a good, if a relatively small, example.
CONCLUDING REMARKS
In this chapter, I have critically examined a number of arguments suggesting that the African countries cannot learn from other experiences because they possess uniquely disadvantageous conditions against any attempt to develop their economies through deliberate measures.
I first criticized the more general arguments espousing “Afropessimism” on the bases of “structural” factors like climate, geography, history, and culture. Then I critically examined four types of arguments skeptical of the applicability of industrial policy to the African context—natural resource abundance, political economy, bureaucratic capabilities, and the changes in global economic rules. I maintained that, while all these arguments contain some germs of truths (some more than others), they are all highly biased and partial.
The African countries—even the exceptionally well-endowed and most industrialized South Africa—still need huge amounts of industrial development. Such developments require substantial degrees of industrial policy. Given this, getting industrial policy right and getting the conditions for its successful implementation right are not matters of choice but imperatives for the African countries. In this chapter, I tried to show how the existing possibilities may be exploited and the constraints overcome in all sorts of areas—ranging from landlockedness to bureaucratic capabilities—through an appropriate mix of vision, realism, institutional reform, and investments.
NOTES
This is a modified version of “Industrial Policy: Can Africa Do It?,” a paper presented at IEA/World Bank Roundtable on Industrial Policy in Africa, Pretoria, South Africa, July 3–4, 2012. I thank for their helpful comments especially, in alphabetical order, Mario Cimoli, Akbar Noman, Simon Roberts, and Joseph Stiglitz.
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